Brazil’s regulator of the payments industry has been focusing on increasing competition in the space.

Cielo S.A. (NASDAQ: CIOXY) and PagSeguro Digital Ltd (NYSE: PAGS) are now facing a tough competitive environment, according to Guggenheim.

The Analyst

Analyst Jeff Cantwell initiated coverage of both Cielo and PagSeguro with Neutral ratings.

The Thesis

Cielo is the largest acquirer and PagSeguro is among the fastest-growing acquirers in Brazil and both companies could significantly impact growth in Brazil’s electronic payments industry, Cantwell said in the Tuesday initiation notes.

Checks indicate rising consumer confidence and spending that are coming along with an improvement in Brazil’s economic outlook, the analyst said, adding that this could boost volumes in the payments industry in the back half of 2019.

Cielo’s large size means its planned strategic transformation is taking time, Cantwell said. This could continue to exert pressure on the company’s revenue through 2019, with contracting and a shift away from larger merchants taking place, he said.

Stiffening competition could also impact Cielo’s margins, the analyst said.

Guggenheim projects a 200-basis point contraction in EBITDA margins and 10-percent decline in EPS in 2019.